Using Equity to Buy an Investment Property – When am I Ready?

Property investment has long been one of the tried and tested ways to accrue wealth. The Australian property market is healthy, and in places such as Melbourne and Sydney, it is growing quite rapidly. This means that both of these parts of Australia, as well as many others, are ripe targets for property investment.

It is easy to think that becoming a property investor in Sydney or Melbourne requires vast sums of cash and working capital. However, the truth is that many people already have the financial assets needed to invest in property, in the form of equity held in their own home.

The simple explanation of this is that if your home has increased in value since you purchased it, then you have a positive equity position. You can refinance your home to leverage this equity by investing in additional property.

How Much Equity do you Have?

Working out how much equity you have in your home is really very simple to do. Take the current value of the property and subtract any mortgage remaining, and the result is the equity. For example, if your home is worth $1,000,000 and you have $600,000 left to pay on the mortgage, you have $400,000 in equity. Very simple.

However, equity is also a compound calculation in reality. Continuing with the example above, if you currently have $400,000 basic equity in your home, and your property has increased in value by 10% a year, then you can consider the equity value to be $550,000 in the coming 12 months.

Finding a Pivot Point – When to Invest?

Now that you know how much equity you have in your property; how do you decide when is the best time to begin investing in additional property? The answer to this question will depend upon many factors such as your age, expected income in future years, and any other forms of income such as an inheritance that you expect to receive in the future.

As a rule of thumb, you are looking for a pivot point. A place along your future financial timeline where your income will create enough space for you to take on a little additional monthly spending.

To put things simply, if you currently still struggle to make your monthly mortgage repayments, then thinking about re-mortgaging to free up the equity in your property might not be a sensible option.

However, if you are at a stage of your life when you are meeting monthly expenses easily, with cash left over, it could be time to start thinking about using your current home as equity for property investment. Of course, there is no guarantee that you will make a profit, as with any type of investment. But property investment is one of the more stable investment opportunities. If you have significant levels of equity in your own home, you really owe it to yourself to use it in order to build a better financial future for you and your family.